Good morning, everybody. I'm delighted to be standing here again presenting another set of excellent financial results, which is a reflection of the group's positioning in the current market. What does the agenda look like for today? I'm going to pick up on the highlights and strategy, I've invited Martyn Clark today, which is a little bit change from tradition, who is our divisional director for the South East. As I thought you might find it useful to hear from a senior director within our company to talk about our customer care improvement plan on the ground. I intend to pick up on some operational review matters before passing to Mike on the financial review, I will look at current trading and provide the summary. Persimmon now has a clear purpose to provide long-term sustainable returns.
At the core of this is a desire to build good quality homes at a range of price points across the whole of the U.K., meeting the country's housing need. We believe this will not only create and protect superior long-term returns for our shareholders, but also for our customers, our workforce, and the wider stakeholders. The purpose manifests itself in the following key strategic areas. Firstly, my number 1 priority, which is to improve the quality of customer service. We are also committed to meeting all the housing needs across the country. These items, along with the following points, all contribute to ensuring we maintain our industry leading financial performance. Let's have a look at that performance. What I'd like to draw your attention to on this slide is the change in volume, which shows a 6% drop.
You might think it strange that I draw your attention to that, because in many people's opinion, that would be seen as a negative. However, that is not the case. This is a conscious business decision we have taken to put customers before volume, as I believe that is the right thing for the long-term future success of the business. Despite that drop in volume, trading performance remains strong. New housing operating margin of 31%. Profit before tax of nearly GBP 510 million. A return on average capital employed of 40.5%, including for land credits. Most importantly, our shelves are now being restocked, which enables all our processes to be enhanced and followed even further. GBP 142 million additional WIP investment in the ground. 19% more equivalent units. I am delighted once again, our industry leading financial performance has been maintained.
Now I would like to look at my number one priority, which is the delivery of our customer care improvement plan. I am encouraged by the improvement we continue to see in this area, particularly in our customer satisfaction rating over the last six months. However, in my opinion, customer satisfaction is not just about quality at handover or even about star rating. It's not just about increased financial investment or robust quality assurance process. It is also about improving consumer rates, improved customer communication, improved post-handover service, access to modern technology, and finally, ensuring people's homes are built safely, which I will touch on later in the presentation. Now I'd like to pass over to Martyn, who's going to update you on our customer care improvement plan. Thanks.
Good morning, ladies and gentlemen. Persimmon are making a significant investment in customer care. Financially, we've made a 40% increase in our customer service expenditure this period compared to last period. More importantly, committed GBP 15 million worth of additional resource to cover customer care activities on an ongoing basis. We have, as Dave touched on, made substantial investment in work in progress, GBP 142 million. That will enable us to follow our processes more consistently. Our customers will be able to buy properties in a more advanced stage, and we will be able to offer more accurate completion dates. If we refer to the chart below, you can see that comparing H2 2019 to H2 2018, the number of staff we have in our customer care departments has increased by 44%. Persimmon have a robust quality assurance process.
We have a 7-stage pre-completion inspection process, which I'll refer to on the next slide. With our increased investment in work in progress, we will be able to follow our processes consistently. Our 7-stage pre-completion process, a robust process. If you look at the people involved in our process, this is to the time that people actually move in. We have our site managers do the check on the quality. Our contracts managers, the line managers, the site managers, check the property. The blue and green card that we refer to is our sales check. We have a director of the region check the property, and then we have an independent quality checker also review the property. This all takes place before a homeowner receives the keys. What I'm really pleased about is our desire to empower our customers.
The retention scheme was announced earlier in the year, and I'm pleased to say that from the 1st of July, all reservations that were taken, people have had the opportunity to take the retention. However, what we can say is the retention cover will be increased to include all faults, not only recorded at key release, but also within the first week of occupation. That removes any criticism for rushed handovers. We will capture all defects and we will deal with them. We are taking the lead in consumer rights. This is a U.K. house building industry first. We do, however, recognize that we constantly need to improve the customer communication. We have 11 key stages of communication with our customers from the time they reserve. We have an improved company complaints procedure. Our complaints are logged, monitored, checked. There is a clear escalation process.
What happens when a customer moves in? How do we maintain high levels of customer care post-handover? We've already touched on the retention. That will give our customers the confidence that we will deal with the defects. We have a 7-stage post-completion procedure, which I'll review briefly on the next slide. We've also changed our maintenance operatives working hours to enable us to react to the needs of our customers. We have an earlier start, a later finish, and weekend working. The 7-stage post-completion inspection. You can clearly see this is a robust process. It involves our site managers, our customer care managers, our directors, and it covers the period up to two months after a completion. We should capture all defects, and they will be dealt with. We are a leader in access to modern technology.
FibreNest is now fully established. Persimmon are the only house builder able to deliver their own full fiber network to new developments. By the end of the year, we should have circa 5,000 homes connected. Later during this year, we'll have a new customer portal that will enable better digital integration with our customers. We'll be able to deal with customer care, pre and post-completion communication. In summary, with the improved disciplines and enhanced robust processes and our significant increase in capital investment in all areas of work in progress, people and technology, this is already resulting in improved customer care satisfaction levels, and I'm convinced this will continue to improve. Okay. Dave.
Thanks, Martyn. It is very important to me that our customers feel safe in their homes. We've reviewed our pre-start process and looked at all stages of the build from start to finish of the home buying process. We've looked at the principles of the Hackitt Review and looked to incorporate the principles of the Golden Thread, which is set out within it. We believe the principal risk to the implementation of the Golden Thread is to ensure its effectiveness and policing on the ground. How do we intend to ensure that the Golden Thread is followed? We intend to invest in 31 independent safety and quality service inspectors. This is over and above the existing facility provided by a warranty provider.
This is us taking an industry lead to ensure. There are things that we consider to be a principal risk, whether it be safety, whether it be a quality issue, that we can ensure that someone independent, just like health and safety, is providing an extra layer of check the checker to ensure it's complied with. This investment is intended to eliminate situations like the cavity barriers in the future. Now I want to talk about how we are meeting the country's housing need. The group's regional structure has been further strengthened in the year with the introduction of our South Yorkshire business. This has supported our excellent national coverage across the U.K. of houses at the right price point, in the right place, with the right product. In particular, I'd like to draw your attention to 35% of our private sales are priced below 200,000 GBP.
That is an area we specifically positioned the business. I'm also particularly proud that 52% of our new homes sold are to first-time buyers. I'd also like to draw your attention to the fact our average selling price is 17% lower than the national average. That hasn't just happened by chance. That is due to our positioning. 11% of our private sales are priced less than GBP 150,000, and our increase in output is greater than any other housebuilder since 2012. Persimmon is playing its part in meeting all the country's housing need. Pricing has remained pretty firm throughout the year, but I'd like to draw your attention to the completion change in the Persimmon South region. We have 10% and the Charles Church at 36%. The reasons for that are three primarily.
The first one is, as we said before, larger four-bed houses are particularly sticky at the moment, and that is specifically in the Southeast division, although there is signs of that throughout the country. I'd also like to draw your attention to the 10% in the Persimmon South, because this is mainly due to our strategy of restricted release and then parts of the South where we've had to let the build catch up with the demand for sales. This is reflected in our average selling price. What you can see from this chart is in our core market areas where we have the right product at the right location at the right price, our selling prices have showed reasonable growth, 4% in the North and 5% in the South. If you look at Charles Church at only 1%, which reflects the difficulties in that market area.
In my opinion, the company has a duty of care to our workforce. I want Persimmon to offer opportunities for all. I want Persimmon to be a company to fill your potential. As you've seen before, in the last two years, we have promoted over 570 colleagues, and I'm delighted to show in the first half of this year, we have promoted a further 200 colleagues. We have a trained and talented workforce, and I would like to draw your attention because it really does make a difference to these young people's lives. We've taken another 150 traditional apprentices on due to start in September. These young people will have the chance to develop a trade. I also want everyone to share in the success of the company. That's why we're the first house builder to adopt the Living Wage Foundation payment criteria in January 2019.
We are also very aware of our duty of care to the communities which we operate and our wider stakeholders. We support over 50,000 jobs. We have contributed over GBP 255 million to affordable housing and planning contributions. Our Building Futures campaign is now firmly established with over 3,500 applications. I know my team take great pleasure in the fact we supported 150 schools with their sports days with some participation from Team GB athletes. At the heart of Persimmon's success is how we manage our land holdings. We have a six-year forward land supply, and I can confirm today that the land market continues to provide opportunities in line with our land holdings current margins.
Let no one be any doubt the quality of our land holdings will secure the future financial performance of the business, and I can assure you that our land holding is in very safe hands. We continue to have strategic land success. Nearly 2,000 plots successfully converted in the period. I'd also like to draw your attention to almost 16,000 acres we currently have at the 30th of June 2019. More importantly, within that strategic land acreage, we have nearly 18,000 plots allocated which aren't yet on our land bank. Strategic land investment remains a fundamental element of the group's business model. Finally, I would like to touch on our offsite manufacturing. We continue to focus on self-help through innovation. We have a brickworks factory producing nearly 25 million bricks, a tileworks factory which will be introduced in quarter four this year. We have Space4 providing timber frame homes.
All these three elements are further examples of how we differentiate from our peers. I'd like to pass over to Mike.
Thanks, Dave. Right. What we're going to do now is we're going to look at, in a bit more detail, the first half trading performance. We'll look at some of the major features of the balance sheet, and we'll look at the cash gen and returns in a bit more detail. First half trading. We're quite pleased with the strength of the trading through the first half. Dave has already touched on the focus on customer care and the holding back the sales release to later stages, so we can offer more accurate moving in dates, et cetera. Obviously, that has impacted volume in the first half, by design. To deliver GBP 509 million pre-tax profit, a tad down on the comparative period, is a very strong performance, with the return on equity at 31% as at June.
That's a rolling 12-month statistic, as you can see on the footnote there. It's still a very strong financial performance, supported by that 31% underlying operating margin. The mix on the sales have changed a bit. 21% of the sales mix being delivered to our housing association partners within the partnership business. We've already touched on private and the volume coming back a tad. You can see there, the average selling price has remained pretty firm, as Dave provided a bit of color around that. We've seen quite firm pricing conditions, and behind that in the private market, around about 1.5% underlying inflation, probably around that mark, which has obviously supported the margin performance. New housing revenue, around about 6% behind the comparative period. The quality of that revenue in terms of the margin delivery remains very strong.
You can see the bridge there, the volume driver coming through. Counteracting that, the margins remain very good. The margin improvement is encouraging. If we look into that in a bit more detail, we can see that a primary support is the land cost recoveries. We have incurred more cost on the customer care side, as Martyn has already touched on. That 40% increase period on period is around about GBP 4 million quantum in the first half of the year. Further investment in supporting customer quality and service. That commitment, as we've touched on already, is going to continue. We've provided a GBP 15 million sort of annualized figure as an indication of what we think that will cost on a full year, fully invested position. The margin performance, as you can see there, at 33.8% gross, 31% operating margin, still very strong.
The land recoveries being a key support to that. Looking at the land bank, you can see there at the top of the bank, if you will, in terms of the owned plots, the 13.1% cost of revenue percentage is still very strong. We're managing to maintain the quality of that land bank, and we've done the usual sort of simple pooling of the profits embedded within the land bank there. If you do the simple weighted calculation, that gives you a figure around about 34%, which is very similar to where we were at December. The land bank continues to provide a very strong platform for the business moving forward. Total investment just over GBP 2 billion. The selective land replacement, maintaining that quality, but has also led to a reduction in the land creditor.
The amortization, just to give you a bit of an insight into the land creditor, over the next six months, we've got about GBP 140 to be paid down on that GBP 484 number. The six months to 30th of June next year, it's about GBP 120 million. We've got decent amortizing tail on that land creditor number. The continued work-in-progress investment is there to support the customer experience. It's pleasing to see that we've managed to, through a combination of continuing to push on with our construction programs and later release, deliver a more solid platform in terms of availability for customers on all our sites. That has resulted in about GBP 830 million of cash being held at June. That's after the first capital return payment of the year that we paid at the end of March, around about GBP 400 million.
A very strong return on the capital employed in the business at around about 40%. That calculation has got the land creditor in it, which is very similar to the comparative stat that we saw last year. The work-in-progress investment supports the quality and service that we are providing. You can see there that we maintain good liquidity. The net free cash generated by the business, at GBP 180 million. That obviously is after the investment in the work in progress. We can see there a bit more clearly that the cash from operations is still very strong, around about the GBP 500 million mark. Again, the investment there in the working capital is clear to see. The bulk of that going into work in progress, again, emphasizing our focus on supporting customer moving forward. We've maintained strong liquidity.
That's obviously important as we move through the cycle. I think this is the facts looking backwards, the shape of that, you can see the shape of the cycle. Earnings come and go, but cash generation is a permanent fixture of how we run the business. That is a result of the combination of how we manage the balance sheet, and obviously, the cash generated through trading. Selective land replacement will support the strong liquidity as we move forward. The strong work-in-progress investment is there. Yes, it provides a bit of cover to perhaps the Brexit risks that we're facing into. It supports customer experience, and also it will unwind quite quickly.
Obviously, if the cycle does end tomorrow, we've got good support to the sales that would take moving into that sort of period, and the work in progress would unwind quite quickly, thereby generating further cash inflows. Also, just to remind everybody, we will continue to minimize financial risk through the cycle. We're not looking to insert any structural gearing in the balance sheet. We've talked about a cash hold of perhaps GBP 700 million-GBP 750 million for the scale of business we currently are. Splitting that down, that would represent probably around GBP 400 to cater for the annual working capital cycle amplitude, together with GBP 300-GBP 350 of a bit of a war chest for investing in new land. That remains our position in terms of cash hold. The business scale can change, obviously, as the cycle unwinds.
If we have a smaller business at some point in the future, then it's all about managing that process and generating the cash release out the balance sheet through that cyclical change. Obviously, that's a key consideration in terms of when we're sort of reflecting on capital returns, future capital returns from the business, which I'm sure you'll all be reflecting on. The liquidity of business, as we've seen, is a permanent feature depending on how we manage the balance sheet as well as the trading. The capital return is split into two. We've got a bottom slice regular return of GBP 1.10 a share. We think that's a permanent long-term commitment. Anything over and above that represents the surplus capital that we would be returning currently GBP 1.25 per share. We set out a three-year view last year, to deliver the GBP 1.10 and the GBP 1.25.
We've met two years of that three-year commitment, one year to go, with that final GBP 125 scheduled to be paid in March next year. We are in a very strong position in our markets. Dave has already touched on the spread and depth of the land bank in support of our positioning across the country. We have got strong liquidity, but we are watching and judging the cycle carefully, being mindful of the risks that we face. That is the current capital return plan. No change there. You have all seen that before. As I say, we have got the final GBP 125 scheduled for next year. We will continue to review the surplus availability to return to shareholders, and we will be communicating that in line with our current plan when we release the final results in February next year. At that point, I will hand back to Dave just to finish off and summarize.
Thanks, Mike. The attached table shows the strong forward sales position. It shows it to be only 3% down, which I'm delighted with when you consider decisions we've taken to put customers before volume. I would also like to draw your attention to the 1% increase in ASP. This should help offset any build cost movement in half two. The strong forward sales is a reflection of the encouraging summer weeks trading we've seen in the last seven weeks. This gives me confidence for the second half when combined with, for the first time in a long time, early indications that labor and material availability is improving. That selling prices remain firm. We have a strong forward sales position of over GBP 2 billion and 19% increase in equivalent units. Finally, we have quality sites throughout the country with the right product at the right price.
We have positioned the business in the correct place in the current market we are experiencing. Persimmon is a change in business. The company is very aware of its obligations to its wider stakeholders. In particular, customer satisfaction is my number one priority. We should not forget the solid foundations Persimmon is built upon. We have industry leading margins. We have industry leading landholdings. We have industry leading profits and returns. We have industry leading liquidity. Most importantly to me personally, we have a highly motivated and talented workforce. Thank you. Thanks for that. I'll go and take me seat, we'll go through another normal questions and answer. The hands went up pretty quickly there. Gonna start at the front.
Thanks. It is Will Jones from Redburn. Three if I could please. First, just picking up on build costs. Can you remind us what improvements you have made from a specification perspective, this year and what, if any, you intend to do as a kind of addition maybe next year? Against that, to what extent the internal efficiencies we have seen from internal supplies or external savings might still be available next year to offset any added spec? I guess what I am trying to get to is when we look at the 34% gross margin, the land bank, to what extent do you think that is fully loaded for the changes that are coming down the track? Second one is just around customer satisfaction.
Can you remind us what line of sight you've currently got on your kind of monthly— Is it, are you like two months delayed, so you can see effectively through to June completions maybe at this point? I think Dave, in July you talked about a considerable improvement of late. I suspect the answer's no, but would you be willing to give us any quantification of how the 79% might have moved or is trending kind of more recently? The last one is just thinking about, I guess, the future size of the business, more medium term, but to what extent do you think the changes you've made in the business influence how big you think Persimmon can be from a capacity perspective over that medium term? Thanks.
I think if you take the build cost-
Yeah, I can do that.
Generally, the specification, we've done the review. We've looked at what we need to do, and we see no further investment needed in that area. I'll let Mike pick up on that in a bit more detail. Customer satisfaction. It runs eight weeks from behind the legal completion. What we do know is the current HBF reporting period finishes in October. Them results do not get published until March. We also know that our results for last year were 79%. We also know that we were informed you that we were making improvements at our last update in July. I can confirm that them improvements have continued to see across the board. What I'm not prepared to do is go on record yet to say what they are. What I can say is, I'm pleased with the results, what we're seeing.
The business is completely behind the improvements that we're trying to make, and I'm confident we will get there. I don't know if you want to add anything to that, Martyn?
No, no. I think the measures we've taken are definitely being incorporated across all regions.
Good. The future size point, this is a decision we've taken to put customers before volume. I think it's a 6-12 month hiccup. I believe it's the right thing to do to create long-term shareholder value, and I believe it's the right thing to do to make the capital investment in the business to give us the opportunity to ensure our processes are followed. What I would like to hope, when our shelves are fully restocked, we can release our outlets at a sensible program. If the market's still there, the volumes will start to move back upwards. Mike?
Yeah, I think on the margin question, I think it's sensible to think that there's a bit of a margin fade probably as we move forward. The supply chain is still inflationary. We are seeing some interesting changes over more recent weeks, particularly on groundworks packages and costs at the front end of the development process, if you will, on offsite works, external works. We obviously can't second guess whether that might tighten up again or whatever, but that's slightly encouraging. No one knows what Brexit will bring in terms of tariffs and sterling weakness, et cetera. That could impact on costs a little bit, albeit the bulk of what we use is onshore, probably a tad over 80% or so. I think, the supply chain is inflationary, and the overall industry is trying to expand output in line with the government's policy objectives.
As new entrants come in and perhaps we see at the back of the book, you've got the picture on start, which seems to have just nudged down a little bit more recently. If the industry continues to move output forward successfully, then obviously the supply chain has got to try and keep up with that. I think, as Dave's already mentioned, the investments we've made in brick and tile and Space4, does help us mitigate some of that cost pressure, as does the core house types that we're increasingly getting more coverage from. As you know, you've got to work hard on many fronts to mitigate these issues. The group procurement activities, we continue to make strides on that side as well.
I think at the end of the day, I think it's sensible to take a view on a bit of a margin fade, as we move forward over the next year or two. I think, the land cost recovery is, depending on the sales mix as always, is pretty good, if you will. It's in line with where the land bank sits. Moving forward, you wouldn't expect a lot of more significant support, sort of period on period to come out of the land bank because it's already delivering good support.
Andy?
Morning. Andy Murphy from Whitman Howard. Two quick questions, if I may. First of all, in terms of the 15 million investment, it probably works out about GBP 1,000 a house. I was wondering, around that, if you're delaying the release of certain houses, does that in itself bring extra costs in because you're telling the construction team to take a bit longer and take a bit more care, therefore, is there more labor costs in terms of that extra duration? Secondly, around the living wage that you're introducing, just wondering to what extent, how many employees that covers and what would be the annualized financial increase in that cost? Thank you.
I'll deal with the first one if you want to deal with the second one for us, Mike.
Yeah, living wage is all about really the way that you approach paying the employees within the business. It's about the balance between sort of the regular payment of a basic salary and any variable pay elements. In actual quantum terms, the vast majority of employees in the business were already paid beyond the living wage minimum by some margin. It was how it was divided, whereas a living wage is really all about delivering a stable, reliable, weekly, monthly income level that people can rely on. What we've done is we've done quite a lot of work inside the business readjusting how people are rewarded, that balance between base salary and variable pay elements, commissions, bonuses, et cetera.
If you think about how sales staff at the front end are rewarded to a certain extent. We've done quite a lot of detail work readjusting that. We've obviously consulted with staff, et cetera, gone through those processes, which takes some time. It's good to arrive at a point where the employees all have a regular weekly, monthly income as a base salary, if you will, which is beyond the Living Wage parameters with variable pay on top of that. It wasn't particularly much of an on cost for us. As I said earlier, it was really the shape of how that was delivered.
As I've said previously, one of our big problems has been completion on time, specifically because of our first-time buyer profile. People's need and desire to get into their house is a lot different when you're a first-time buyer. For example, if you're in rented accommodation compared to when you're in an existing house and a month's delay doesn't materially make any difference if you have to stay in your house for a period of time. What the additional investment does, it gives us more time and give better accurate dates. It's not an additional cost as such, the time it takes.
In fact, in my opinion, I think in the medium term, it gives us more opportunity to get the house right first time. I think that in itself will actually save money as we progress through, specifically on the back of the retention we're introducing, which I believe will change behavior within the company, because there's going to be a lot more emphasis and energy around anything that's picked up through the retention process.
No, I don't think it's actually going to cost me more money for it to have that additional time period. I think in the short term, the medium term, it could actually save more money. Florence.
Thank you. Florence Tong from Jefferies. Three, if I may. The first one, actually, to Martyn. Thank you very much for the presentation on the customer care. Can you remind us what has changed from a year ago? You obviously set out these pre-checks, these post-completion checks. What's new within that? Was it a five-step process before? Was it a three-step process? We can understand the changes that have been made. Second of all, in terms of the land bank. If we strip out the change in your land creditors, it appears you spent only about GBP 175 million on land in the first half. Is that reflective of uncertainties that are out there? Is it reflective of opportunities? Is it just pure lumpiness within there?
Lastly, just in terms of, again, customer care, but this is slightly more direct towards Mike, given all the changes you put in place and the 40% increase in costs, where do you think your customer care spend and service sits relative to your peers? Those who do have an HBF rating which sits in the four or the five star. Where do you think you compare now in terms of the efforts that have gone in, even if you can't tell us where the ranking may be necessarily?
Okay. Do you want to take that first? Yeah, I'll do that last one first. I think you've got to be careful of comparing the spend, because you can be spending it for different reasons, if you know what I mean. I think that what, as Dave just said, what we're trying to do is prevent issues arising. That is going back to Dave's emphasis on the principles within the Hackitt Review, which really isn't about two and a half story dwellings. It's obviously emanating from the review associated with high-rise construction. The principles remain the same in that if we pursue those in the right way, then it should eliminate issues arising. I think that therefore the spend on post-handover issues in terms of customer care, et cetera, should diminish.
I think that Dave is absolutely right in that the visibility that the retention will bring within our business, the strengthening on the processes that Martyn's already touched on, are all working towards more attention and diligence around the processes pre-handover, so that post-handover, in terms of customer care spend as defined, actually diminish. I think that pointing to spend being large isn't necessarily a good thing, even if it comes with a four-star rating or whatever. If something's wrong, it matters how you deal with customers to put things right, and that is caught by the recommend rating. You could throw a huge amount of money at it post-handover and achieve a higher rating. What we're trying to do is prevent the issues arising in the first place, because that really accords to the principles within the Hackitt Review.
That's what we're trying to do. Rather than comparing ourselves to a post-handover cost pile, we don't really think that's the right thing to be doing, particularly thinking about the future and positioning the business with the right processes moving forward. I think the principles in the Hackitt Review, we believe, will gradually be adopted throughout construction in the U.K. anyway, out of necessity. We want to position our business in that way now. That's the process. I don't know if you want to add anything.
I just would reiterate, it's not just about the GBP 15 million. We've made major investments in two areas. We've made the decision to use some of that surplus cash in our balance sheet and invest GBP 142 million of it into WIP, to ensure the houses are at the right stage, to ensure that the process can be followed more diligently, to ensure that our seven-point check happens. If we follow that seven-point check, be no one any doubt we know it works. We have five-star businesses in all our companies, those are the businesses that have got the stock on the ground. This isn't about throwing money at a thing and spending like a drunken sailor. This is about having the right WIP on the ground, the right processes, because we know it works in the industry when we can do it.
The third thing is, to enable that to happen, I made the conscious decision to put customers before volume. We sacrificed 500 completions to make this happen. That is not something you take lightly. That is a lot of money. Let no one be in any doubt, we believe in what we're doing here, and we believe it's going to work. In terms of land bank, I'm pleased you've asked that question because that land bank hasn't just happened by chance. That's 20 years of managing from me and Mike to ensure we've got to that position. As I've said often, I'm not going to give that position up lightly. If the land deals aren't there, I'll not buy them. I've also said previously, I'm happy to see the land bank come back.
In this instance, it's not particularly that we're not seeing the land opportunities, because I do think we'll be buying more land in half two than half one. The minute them opportunities aren't there, we're not going to sacrifice what we've worked hard for over 20 years. Martyn, would you like to touch on the customer care that's changed?
Well, I think that Mike and Dave, in part, have answered quite a bit of your question. The 7-stage pre-completion inspection process you referred to, we are carrying out more checks this year. Not all of those items last year were necessarily being carried out on 100% of the properties because that wasn't our process. This year, our process is to make sure we do carry out those checks on 100% of the properties. The directors are more involved this year with the quality of the homes than they have been in the past.
Sorry, I'm going to be cheeky and do two follow-ups while I have the microphone.
Give it up.
The first, what about the post-completion? Was that there last year? Is that new?
If you think about what we're doing with the retention, this is a groundbreaking move, isn't it? Who else is offering a retention in the sector? Why are we doing it? There's an all-party working group looking at a new home ombudsman. Unfortunately, that's about compensation, really. The horse has bolted. What homebuyer really wants to enter into a process to get compensation for something that's wrong with a house that they've bought? A customer doesn't want to go in that direction. I think it's incumbent on the industry to recognize that. That's not the solution to delivering high-quality product, is it? You've got to address the issues before they arise, if you will, to make sure that they don't arise. That's what this retention move does.
It brings a lot more visibility to ensuring that the behaviors in each of our 31 businesses become very, very focused on making sure the quality's right. They're going to be managed in line with the retention that's held by customers in their business. It's going to be very visible. They're going to be very focused on making sure it's minimized for all the right reasons. That doesn't involve compensation. It doesn't involve throwing a lot of money at customers post-completion to make them happy. It's about getting the product right so that they are genuinely pleased.
Sorry, my second follow-up. One of your peers talks about the cost of getting it right first time to be around five percentage points of margin. To be clear, when you're talking about customer care, you are only talking about the cost for the post-completion?
I think-
We're talking two slightly different elements.
To be fair, I don't recognize that figure at all and would need more information.
Yeah, from them.
If you want to write to us separately, showing the buildup of what the spend is and what the 5% is. I'd be very, very interested to see where they're spending all the money.
Have you got the analysis of that 5%? No.
It could be here sooner than here. Thank you.
To be clear, when you're talking about customer service, you're talking post-completion.
Well, customer service.
That was different referencing there.
It's the journey, isn't it? You rock up. You've been on the website, you've found the particular type of home in the location you want to live, because it's just around the corner from your parents or whatever, because you've got a young family. It's all about the journey that you travel from.
270, that's GBP 12 and a half grand.
really visiting the website, isn't it? The experience you have. That's why the customer portal is important. We can provide a more rounded experience to customers right from the off in providing better communication opportunity, et cetera. It's not just post-handover. It starts from first contact. Everybody in the business has to be tuned into that process. That's why communication's very important. That's why, it's your construction activities, how you deal with customers on a construction site. It's your health and safety around that. It's about their living environment. You've got some people already living in their new homes while others are being constructed. It's the whole thing. It's not just after handover. You've got to look at every part of your business in terms of delivering a more rounded, enjoyable experience.
Arnaud?
Thank you very much. Arnaud Lehmann, Bank of America. Two questions, please. Firstly, I guess a follow-up, Mike, on what you just explained. Did you have to invest anything to improve your brand or recover? There's been a lot of bad press, obviously, this somewhat backward-looking TV show a few weeks back. I think that was back in June or July. Clearly, you're investing a lot for customer care once they are customer. What are you doing so that people think, okay, I have the choice between, in this area, Barratt Homes, Bovis and Persimmon. Now, Persimmon, I remember there was a bit of bad press. I'm not an expert. What are you doing to make sure that your brand is back on track, so to say? Just maybe one on Help to Buy. I believe there are some price caps introduced from 2021 by region.
Could you please remind us how your selling price compare with these price caps? Could that limit house price inflation in your view if you want to remain within the bound of Help to Buy?
Can I do that last one?
Okay, yeah. Certainly.
When we compared our average selling price of our offering across the regions, it was actually only the Northeast that it seemed a bit tight in terms of the price cap that they were suggesting for the Northeast. Everywhere else, we seem to be there or thereabout. Whether they may have to look at that, I'm not sure. It seemed a little low in the Northeast. Everywhere else, we were quite content with how that was scaled.
In terms of the brand, I think you're quite right. A lot of the issues which have been identified and which have been covered are what we would consider legacy issues. However, I want to treat them in that context. We are dealing with them. We've made massive progress in that process of dealing with any legacy issues. However, there's still a bit more work to be done on that. What I can say, any customer who brings anything to us, we will resolve it, and they will only provide a standard and even further if necessary. I think what you're really driving at is what makes the customer pick our houses, and there's various moving parts in that. Of course, customer perception of the brand is important in that. What we have done, if you think about it, has been industry leading.
We've given the first time anybody a retention. That empowers customers and give them rights. They know fine well if they move into our house and we haven't fixed their items, they can keep our money. To me, that gives them more confidence than any star rating. That really makes a difference to them. What I wonder is, if all our peers are so brilliant about the houses are so perfect when they move in, they'd have even less work to be worried about and reduce their retention. We believe this will become the industry norm, and we believe we've done the right thing by introducing it. I think our customers will benefit from it. Also, it's one of the lovely scenarios where I think the company's behavior will be improved and to drive to get their houses better first time.
Thank you.
Gregor.
Gregor Kuglitsch from UBS. I've got a few questions. The first one is just to come back on the WIP. You've obviously invested, I think it's kind of started last year in the first half. Where are we on that journey in terms of the investment? How much more is there?
We said in July that we'd like another circa 10% come December in terms of EUs, equivalent units on the ground. Another way of sort of benchmarking it, we look at a percentage of the previous 12 months turnover, and you can see in the pack, we're back up at 30% at June. That might tickle forward a little bit. Maybe another GBP 50 million come December invested. We'll see.
Thank you. The second question is on the ongoing independent review into sort of, I think, kind of root and branch analysis. I appreciate it's independent. It may be tough for you to comment. What do you do if they come out and say, "Well, actually, on the specification side, you're not up to scratch." How would you respond to something like that?
I think the independent review is something that we're looking at positively. It's a forward-looking thing. Its real purpose is to review our systems and processes, what we do at the moment, and see if it's dealing with the problems we've had in the past. I actually welcome that, and I welcome the test to see what we're doing, because we're pretty confident that we are dealing with the issues. It's not for me to speculate what the review is going to actually say. We'll wait and see what happens, what the results are. If that was one of the guidance and what some of the advice that came out of the independent review, of course, we'll look at it.
Okay. Then finally, I think in the sort of outlook statement you hint more on volume for the second half. I don't know what you're trying to say. You're trying to say that you'll have another year-over-year decline?
Yeah, I think.
Or are you-
I think the-.
Because we're obviously now annualizing.
I think what we're saying is that our approach to making sure the build is more advanced at reservation, after sales release. That is not going to change. We are and have made strides on moving our build forward. With more plots, more available at more advanced stages, there's a bit more work to do on that, as we've already touched on. I think that for the second half of this year, I would've thought that, given that approach is going to be consistent, we're going to be down on the second half of last year. I think the figure was something like 8,350-ish, in the second half of last year. We're going to be down on that. For all the right reasons, and as Dave's already said, putting the customer first, if that leaves our volume down, then so be it.
We're very confident in terms of the quality of the returns that we'll be generating. Yes, a bit of margin drift to come through, but nothing substantial. I think, the outturn will still be pretty positive. Probably a bit down on last year, but still a positive result. As Dave said, if that puts a stronger platform into future delivery, well, that's a great investment. That's the way we look at it.
Thank you.
Aynsley Lammin from Canaccord. Just 3, please. First of all, on the kind of recent trading, wonder if you could give a bit more color there. Sounding quite positive. You expect the kind of usual seasonal bounce into the autumn, September. Just what's driving that confidence, be interested in. Secondly, Part Exchange. Just wonder what the percentage of private completions have been sold on Part Exchange and the trend you see there going forward. Then just lastly, on the GBP 50 million of customer care, extra cost, have you provided anything for any retentions you might not get back within that number? Thanks.
Well, I'll deal with the third one if you can pick up on the first two, mate.
Yeah. The recent trade, it's interesting, the sort of the bang up-to-date position. The summer market is quite encouraging. Our weekly take is in terms of private sales rate per site, is more or less in line with what we did in the same period last year. That's a little bit better than we'd been tracking through the first half. That is quite encouraging. It probably plays to the strengths of the positioning of the business that Dave was touching on earlier. We'll just need to see how that continues to play out. Yeah, and pricing continues to be firm. We're not seeing any spike in cancellations. We're not seeing an increase in down vals. The broader picture is still pretty encouraging given the uncertainties that are out there. PX is an interesting one. We are carrying a bit more PX.
Indeed, it's not at the levels that we have done historically. I think in the first half we supported about 10% PX sales with part exchange overall. Back in the day, we'd have been up at 30%. There's certainly headroom for us to support customer a bit more on that side given the secondhand market continues to be a bit slow. We might see a bit more existing homeowner activity, looking to use that PX scheme. We're happy to do that as long as we can agree sensible pricing at the front end.
On the retention, it's been designed to give the consumer confidence. What we didn't want, have a process where if the house had, I don't know, something that was cost more than what the retention was, that they could, we just give them retention, they would lose control. It's been designed to guarantee them that the work will get done. Under no circumstances will the work not get done. In the event they're unhappy how we've done it's written into the retention policy that they call upon the warranty provider, who would then come and do the work to their satisfaction. Therefore, there isn't any risk exposure and non-return of the retention. Where the risk would be if it generated a lot more cost that we'd have to deal with.
I believe firmly the fact that we are introducing this, the fact that our site managers and our staff now have more time to follow our procedures, to follow them, that we will make sure the house is all right. More importantly at key release, which means we shouldn't pick up items at key release, which I believe will save money in the long term.
Ami.
Ami Galla from Citi. Just two questions from me. The first one is on the strategic pipeline. 55% of the strategic component in H1 was about 55% of the land replacement. Can you give us some color as to how is the pipeline moving forward from over the next three years? Should we expect that to continue stepping up? Connected to that, as the strategic component increases, should we also expect that the WIP investment should also increase in line with that? My second question was on the gross margin moves in the first half on Persimmon and the Charles Church brands. They were moving in two different directions. Could you give us some color around that?
Just on that last one, it's about the sales mix and the different sites. There's nothing systemic, if you will, driving that. I think it is just down to the mix, Ami.
Strategic land is obviously very difficult to forecast as when it's going to hit. The planning process isn't a one, two, three, four, five process. It's got different moving parts that come into it. It's very difficult to say on what the timing is going to be and when it's going to be implemented. What I can tell you, which is really encouraging, in named acres we've got in our strategic land bank, we have 18,000 plots of allocated land and plans. That's almost the same as the planning permission. We only move stuff onto the land bank when we secure planning permission. A lot of that, a good percentage of it, is actually freehold, not just option land. Then as for the WIP investment, it depends upon the nature of the sites, because you're quite right.
The bigger strategic sites require large more WIP investment. I think the natural shape and movement will sort of balance that off. I think the biggest moving part in our WIP investment is the decision that we've taken to invest more money up front to get more WIP in the ground, rather than a big further movement in externals.
There's a fundamental principle that if there's a lot more external abnormals associated with the development, your land value is going to be lower anyway.
It's a good point you're trying to make, isn't it?
Yeah. Chris?
Morning, Chris Millington at Numis. First one I wanted to ask was on fire safety. Kind of where are you on that review? Is there any costs associated to it? Could you just give us an overview first and foremost? Next one is just outlet closures in H2. I know it's difficult to predict sales rates, but kind of best guess there. The final one, something Dave has commented on in the past, and it was a feature of Capital Markets Day, and that's senior management retention post the payout of the LTIP. Perhaps again, just an update there.
Okay. Senior management retention. I don't think we're seeing much material change. I think the biggest moving part was obviously Jeff leaving. I'm not sure how you describe that one. What it has given us an opportunity to reorganize our senior management. We now have five divisional regional chairman, and Martyn is one of them, and I'm delighted it's given opportunities to give more people to fulfill their potential throughout the company. I don't think it's a material risk. The exodus, which has been described, hasn't happened. We've seen reasonable stability in terms of them senior managers. In terms of the cavity barriers, as you know, we made a provision for that last year. We expect the spend in remediating these, which isn't an expensive item, to be within that provision we made last year.
We've now inspected over 10,000 properties throughout the country. We continue to follow the data. What I can tell you is we are adopting a zero tolerance approach to this because we believe this is an industry issue. We're not leaving any margin of error on this. If we find a tiny gap, we are replacing the cavity barriers. We'll continue to do that. We'll continue to follow the data.
Is there many more homes you'd like to inspect from here or?
Well, that's the problem. We don't know the exact figure because it'll depend what the data and the factor is, and it's different for different sites.
They're okay.
No problem at all. Other sites will have a reasonable failure rate. What I can assure you is, one, we believe we have made a big enough provision to deal with it. Two, we're giving commitment and energy to deal with it with over nearly 10,000 properties being inspected. Thirdly, we will make sure that all houses are inspected where we believe there's an issue. In terms of outlet closures, mate?
It's hard to determine, Chris. It depends on your sales rights, doesn't it? How long is a piece of string, but I think we've got good visibility of new sites coming through. I think we've said maybe thick end of 90 sites to open in the second half. I think we're off currently about 345 released sites with around about thick end of 20 held back, beavering away on the construction side. I think the shape of that probably is going to be similar through the second half probably.
I.e. a continuation of the 345.
Yeah. Obviously as construction advances on the sites that we're holding back from first release, as they come through and hit the right stage, is it 40%, 55% build complete, then they will come into the release sites. As new sites coming through, they'll be replaced probably with one or two that will continue to advance build without sale.
I think the moving part in that is as we get enough WIP in the ground and when the shelves become fully stocked, that we'll see a lot of the sites where we're holding back release because it's not just you may have a site where you're holding a certain product back, where you have 4 beds available, where we're taking a view not to release the 2 beds too far down the road. I don't think that'll unfold until another possibly the end of year, but maybe it's even at the start of H1 2020.
That's great. Thanks.
Chris.
Hi. Morning, Christopher Fremantle from Morgan Stanley. I know you've talked a lot about the near-term measures you're taking on margins and WIP, et cetera. Wanted to redirect the discussion slightly towards the medium term. You talked about saying it's sensible to assume a margin fade.
Yeah
given the cost inflation outlook. Just wanted to talk a little bit about Help to Buy. You've obviously still got 60% of your volumes, roughly, using Help to Buy. Now that that first change in Help to Buy is starting to come into view, in the forecast horizon, what do you think it's sensible to assume for the impact of that change on your top line?
Do you want to-
Revenues, selling prices.
I'll give you the second one first.
Yeah.
It's interesting, Help to Buy, because we've positioned ourselves at that entry-level point on purpose, so 52% of our customers won't be affected by the introduction in 2021. Because they're first-time buyers.
Which is obviously different to what our peers are. That's something we're very aware of and what's happened, hasn't happened by chance. The second thing I'll point out with Help to Buy, the mortgage market is becoming much more sophisticated again. All right, the interest rates what you can get available for the larger houses if you've got some equity, there's very little difference now between a Help to Buy mortgage and what you can get if you've got some equity. The financial compelling bit is the difference that you don't pay in equity rather than the interest rates. The best advice or the best picture we have of what happens in a post-Help to Buy world, I think, is in Scotland. I don't know if you know, but Scotland has a price threshold on their Help to Buy of GBP 200,000.
I don't know if many of yous know Edinburgh and our East Scotland office. In our East Scotland office, I can assure you there's not many houses we sell for £200,000. What's been the impact of effectively a faded reduction of Help to Buy in East Scotland office? The truth is nothing. The markets remain incredibly resilient. We've not seen sales rates drop. We've not seen revenues drop, and we've not seen the land market disappear from our peers. I'm pretty encouraged that the mortgage market would step into the gap and help supplement that. I'm also confident because of where we've positioned ourselves, that the impact will not be too big on the business.
I think, yeah, it depends on what the future holds in terms of the wholesale cost of funding, all these big global issues. It's hard to see through that, because interest rates are low, aren't they? Look like they're going to remain low for some time to come, which is a big sort of plus for the consumer, and enables the mortgage lenders to provide pretty compelling product to support customer choice. As Dave said, the mortgage market has matured, hasn't it, over recent years? Higher LTV products being introduced and at good pricing. As we've seen in the past, that could change. It depends on if things are gonna change, how do they change? If you take the view low interest rates are gonna remain for some time, then that's quite a supportive backdrop for the market.
I think in terms of medium-term margin, so I think we'll probably have to finish soon. As I keep saying, we may see a big drift back in margin, but what gives me confidence is our land bank.
It's taken us 20 year to get a land bank to where it is. We're not gonna let that drift back, and we know as long as we manage that land bank, we're sensible how we add to it, we're sensible how we bring the strategic land bank, that we know our margins will be there and thereabouts. Yes, they could drift back, but you're not going to see massive movements in margins suddenly dropping five, six percentage points because we know the margins in the forward land bank.
I suppose the exception to that is-
Sorry
A cyclical jolting end to the present cycle, isn't it? If pricing gets squeezed for whatever reason, that may be a different set of circumstances.
Yeah. Thanks.
Thanks, Chris.
David O'Brien from Goodbody. Sorry to bring you back to the customer care measures again, but I guess the customer feedback seems to be pretty upbeat. Just wondering, what kind of interactions have you had with the government on these measures and what feedback, if any, have they given you? Secondly, in the outlook statement you allude to a reduction in your returns on capital employed. Just kind of think in our heads, what's a reasonable level for us to keep in mind going forward?
I think the first one is we've reported the capital employed differently, Mike, if you want to provide a bit of detail on that one, y eah, the capital employed, I think the fact that we are going to be carrying more work in progress moving forward, leads to a view that the returns are gonna be diluted to a certain extent. The other driver is your op margin. Your basic calc is it's your operating profit over the capital employed in your business, isn't it? The sort of scale of business we are, the sort of margins we're delivering, then your numerator is gonna be quite strong still. Your denominator's expanded a bit because we're putting the customer first, if you will. More so in terms of the WIP investment.
Again, as Dave's already said, the land investment side is one that's got to be judged carefully, and that could come back a little bit. We are six years, there's capacity for us to have that coming back a little bit as we move through, depending on the risk profile. Yeah, I think the return outlook still is very positive. Albeit, it's going to come back a little bit.
As for the customer care, as you can imagine, we have regular engagement with the government. We keep them abreast of what the improvements are in our customer care unit. We also have regular invites where we invite MPs and ministers to our sites. That's an area where I think the relationship's improved in the last few months. They don't say whether Persimmon were happy with our results, if that's what you're driving at. What I can assure you is that the results are material, and we're all happy with what we're seeing.
If I could follow up, have they influenced any of the measures you've taken?
Sorry?
Have they directly influenced any of the measures you've taken?
No. The conversations aren't that tight.
Gavin.
Hi. Gavin Jago from Peel Hunt. Just coming back on the 7-stage pre-inspection. The way that was set up, do you see that as kind of an industry norm now? Or do you think it's more rigorous than what your peers in the industry are doing? Linked to that, the retention policy, is there any remuneration linked to that positively or negatively? If so, how deep into the organization would it go?
To be honest, I'll deal with the first one first. It is a good point, and no, there isn't. I think it's something worth looking at. Our energy at the moment has been about driving its delivery and hitting sure it's been quite difficult to reduce, and it's took a lot of drive and commitment by my team, who I'm immensely proud of, have made this happen in the industry when there's a lot of barriers put into place. I think it raises a fair point. I'm sure something the board would look at, whether we should be linking that somehow, because I take that as positive feedback. Do you want to pick up on the seven-point section, Martyn?
The question being, is that industry norm?
Yeah.
I don't think so to the level that we actually carry out these checks. The time that we've got, the 21-day period, my understanding is that's not industry norm. We can't think of any more checks that we could positively do than what we've added. No, I think it is industry leading.
John.
Sorry to stick with you. John Messenger from Redburn. Can I just understand it, as part of this process, when we think about a typical house builder and yourselves doing 7,500 units, would it be right to think that historically you've probably completed 1,000 a month for the first five months and then done 2,500 in that final month? Just to understand it now.
Yeah, it was seasonality, John. Yeah.
Yeah, exactly, and that point around build programs and everything else.
Yeah.
As part and parcel of all this, because I'm just thinking physically for the 31 guys, the directors, the 21-day sign-off, doing all that in December or June.
Well, that's part of.
Number one, is it mandatory? Number two, is part of this going to be that profile of completions will become much more even in that some of your peers have moved that way to try and move away from the June and December, because it just looks like it'll be physically quite difficult for 31 guys to do the sign-offs on 100 a day.
To be fair, I think you make a very valid point, and you've hit it on the nail. That's exactly why we're putting more WIP in the ground to try and even that profile out to give us time to follow the process. The 31 inspectors we are taking are different to the inspectors in the completion process.
Right.
These ones in this completion process, we have a number of them throughout the country.
Got you.
What they are, they are people who are looking at it from the eye of the customer. We have decent access to them. What we know is, and you're right, what we're trying to avoid is that rush at the end. We know, because we know if we get enough time and we follow our process, we'll have five-star builders. What we hope is to get them done. It'd be totally naive for me to say that suddenly we're going to get them all equally spread over the month. We know we're going to still have a bit of a squeeze at the end. That's something I think the industry will always have.
What I can tell you is, just like in June this year, if we believe the quality of houses aren't right, it's handover, we'll not be taking the completions at the year-end.
Got you.
The other part of the equation is bringing the build forward, isn't it?
Absolutely.
Yeah. You can do the checks, you can do the inspections earlier.
Yeah, absolutely. It's ready.
That's a WIP carry for a relatively short period of time.
Just on the financing, because you mentioned earlier GBP 400 plus GBP 350 of kind of war chest, Mike.
Yep.
That GBP 400, would that have been GBP 650 a year and a half ago? I'm just thinking part of this is the WIP has gone up.
That becomes steady state.
effective rather than having the year-end up and down.
That GBP 400, is that maybe actually a bit high on what you might need going forward because you are effectively, you've switched it into WIP? Just to understand that shape.
Yeah.
Is that being too optimistic?
Yeah, I think that's a valid observation. I think we need to review the sort of amplitude of that carry now over the next sort of year, 18 months. If that gives cause for us to take a slightly different view on the sort of 400 number, I guess we'll be talking about that in February.
Just back on the retentions, have all lenders signed up, or is there an issue there in terms of just how many mortgage lenders have agreed to this?
Well, the bulk are already there.
This side.
There's one or two just sort of finally looking at the detail.
Is that more process for them?
It is process, yeah.
method of business.
In terms of how it works, understanding the finer detail. There's certainly good support for it.
Thank you.